Our cannabis industry's hopes and fears

A 'Green Doctors' medical marijuana dispensary in California. New Zealand growers fear international competitors muscling them out of the market. Photo by Getty Images

New Zealand’s burgeoning medicinal cannabis industry eyes big profits, but the barriers to entry are high and international competition fierce, Thomas Coughlan reports.

The nascent medicinal cannabis industry here is gearing up to serve the local market and to export, but it warns against creating expensive rules that could prevent it from competing with already established and large overseas players.

The Ruatoria-based Hikurangi Group raised 300,000 dollars from investors in just three days last week to finance their medicinal cannabis company. The company is also seeking institutional investment and hopes to have $10 million in capital soon.

Helius Therapeutics, another medicinal cannabis company, will complete a $15 million funding round this month. It already has a facility built and IP for products ready to roll out when the Government’s medicinal cannabis bill becomes law.

The Ministry of Health says changes brought in by the legislation will likely take effect in 2019.

Cannabis industry lights up.

Evidence from overseas has shown that the start-up costs and regulation associated with medicinal cannabis businesses can be controversial.

In the United States questions have been raised about the racial divide opening up in the cannabis industry. Black Americans have a long history of being disproportionately affected by punitive drugs policy, leading to high rates of incarceration.Righting this wrong and redressing the imbalance in the prison population is often cited as a reason to decriminalise marijuana.

But in the states where marijuana has been decriminalised, the thriving businesses are overwhelmingly owned by white Americans. A 2016 study by Buzzfeed found less that 1 percent of American dispensaries were owned by black Americans.

The divide has grown so wide that Portland in Oregon voted in 2016 for a cannabis tax to transfer some of the wealth created by the burgeoning industry to communities that had been disproportionately affected by its prohibition.

In many states, the barriers for entry to the industry are high, meaning those wanting to enter the legitimate industry need a lot of money just to be at the table. Those who can’t raise the hundreds of thousands of dollars necessary to move into the business tend to purchase seeds cheaply and sell on the black market.

In Pennsylvania, growers pay a US $10,000 application fee, US $200,000 deposit and need to prove US $2 million in funding, with at least US $500,000 in the bank.

There’s a chance New Zealand’s medicinal cannabis industry could go down the same route.

Ostensibly, the barriers for entry into the medicinal cannabis industry seem low. Unlike some states in the US, which issue licenses for growing cannabis that can cost tens of thousands of dollars, the licensing regime here is relatively cheap and it could change further when the Ministry of Health details the new regime following the law change.

In New Zealand a license to grow cannabis for “cultivation, processing, possession, and supply” can be purchased from the Ministry of Health for $511.11.

This license only applies to low-THC varieties of cannabis already approved by the Director-General of Health. If you want to cultivate another strain for research purposes you must purchase an additional ‘research and breeding licence’ for $153.33.

On top of that, a grower will need a $966 license to deal in controlled drugs and a $13,750 license to manufacture medicines.

But starting a medicinal cannabis company won’t quite be as simple as finding $15,380.44 and growing a few plants in the back yard.

The Ministry requires growers of cannabis to meet certain security provisions. This means growing the plant away from the roadside, away from schools, and installing adequate and expensive security provisions.

The ministry also requires detailed records kept of the number of plants gown, the date sowed and reaped and the weight harvested or destroyed. This is a way of making sure a grower isn’t creaming some of the crop for the black market.

Hikurangi has invested in a high-tech barcode system which tracks each plant as it moves through the cultivation process.

Those who hold a hemp licence must have no criminal convictions. This does not preclude people with drug convictions from entering the industry, only from holding a licence so people looking to move from the black market into legitimate medicinal industry may be out of luck.

I know a guy…

With the bar and cost of compliance set relatively high those in the industry are hoping the law change opens up a reasonably sized market for medicinal cannabis in New Zealand.

Medical Cannabis Awareness New Zealand estimates there are 25,000 people who would use medicinal cannabis products, although the potential market is much larger. A Ministry of Health survey from 2015 found that 400,000 New Zealanders used cannabis and 42 percent of them used cannabis medicinally.

Those numbers were used by Hikurangi in a report issued to potential investors.

CEO of Pharma Cann Chris Fowlie told Newsroom he believed the market could be anywhere between 15,000 and 50,000 people, depending on how the industry is regulated.

Hikurangi anticipates turning a profit in two years and returning a dividend to shareholders in three. Helius director Paul Manning would not reveal what his own company’s projections were, but told Newsroom they were competitive with Hikurangi.

Intellectual Property

The medicinal cannabis industry has less in common with legalised narcotics industries like viticulture and tobacco, and more in common with the pharmaceuticals business, which is primarily an industry based on intellectual property.

Drug companies spend large amounts of money developing an essential product and invest in expensive patent protection to prevent other companies from copying their product.

The sheer expense of developing pharmaceuticals keeps all but the most well capitalised players out of the market. In the pharmaceuticals businesses, companies need to be able to withstand not seeing income on investment for several years.

Hikurangi Managing Director Manu Caddie told Newsroom that his company was using a mixture of crowd-funding and institutional investment to raise capital. He had received written expressions of interest in the company from institutional investors.

Helius’ director Manning said his company were about to finish their $15 million funding round.

Fowlie said that given the average consumer would need roughly a gram a day, 10.1 million grams of cannabis would be needed to supply the New Zealand market, enough for four or five companies he thinks.

However, he argued that if the Ministry of Health opted for a strict regulatory framework, insisting on clinical trials, New Zealand-grown products could be as far as a decade away from the market.

He said the Ministry should insist on GMP (Good Manufacturing Practice) certification, which would mean products had to be manufactured in a facility that met pharmaceutical standards, but had not gone through clinical trials.

Trials add yet another expense to the process.

Caddie said that of the three-stage clinical trial process, the first stage alone would cost $500,000.

Helius has an advantage in the intellectual property stakes. Matthew Rhoden, an American partner, owns IP for 21 products, including six it hopes to launch with. US-based Rhoden developed the products in the North American market, where he was a pioneer in the industry. One product was even developed for the United States military.

The company also owns IP for certain strains of cannabis plants ideal for manufacturing products compliant with medical regulations.

The legislation currently before parliament requires products contain a maximum two percent of non-CBD cannabinoids, including THC. This can be achieved by growing the right kind of cannabis and refining it in the right way, but it’s not easy and means that those with IP ready to go have a huge advantage in bringing products to market quickly.

The international scene

Of course it’s not just local businesses that want to get in on the action. British-made Sativex is already available here under strict controls. Australian companies could be eyeing up a move to the New Zealand market.

This is a sore point for New Zealand cannabis companies, who are prohibited from exporting for commercial purposes under the current legislation, effectively confining them to the small pool of consumers in the local market.

By the end of last year, 20 medicinal cannabis companies had listed on the ASX with a collective market capitalisation of nearly A$500 million.

Stock prices have risen so high that observers including the Sydney Morning Herald have voiced fears of a cannabis bubble. Most of the ASX listed medicinal cannabis companies had yet to turn a profit with investors relying purely on juicy predictions of big money to come.

International players moving into Australia with ready-made IP could also be eyeing up the New Zealand market.

Canada’s Canopy Growth, the largest cannabis company in the world, announced in January that it would “develop research and technical capabilities” in Victoria, Australia in the interest of developing a foothold in the Asia Pacific medicinal cannabis market.

Fowlie believed this meant Canopy was looking to move into New Zealand.

Flush with international finance, expertise and ready-to-go IP, it could mean stiff competition for local competitors.